How Millennials Can Invest $10,000

If you are a Millennial, you should be investing aggressively. Now is the time to begin accumulating money and putting it to work in order to save for the future.

The number of investment choices is almost overwhelming, and your decisions will be based on a variety of factors, most notably how soon you will need your money.

For the purposes of this article, we'll assume that you have $10,000 that you can set aside. What should you do with that money?

Here’s a look at some key investment vehicles, with suggestions for short- and long-term investing.

Short-Term (Five Years or Less)

If you are a Millennial, you should be focused on investing to save for retirement, with a goal of letting funds grow over the course of several decades, if possible. $10,000 now can grow to hundreds of thousands of dollars later if invested well and left to grow over time.

But there may be cases where you want to have access to funds sooner, perhaps because you are saving for a home, car, education or other big expense.

If this is the case, there are some investment options that allow you to preserve your savings and see some modest gains and income. Consider investing in a mix of these vehicles to spread your risk, and understand that short-term investing options don’t receive the same tax benefits as those placed in a retirement account such as IRA and 401(k).

Treasuries – The U.S. government always pays its debts. That’s why U.S. Treasury Bonds are some of the most sought-after investments for people looking to preserve their savings and earn some passive income as well. You will not get rich through Treasuries alone (current interest rates range roughly from 2-3 percent) but they are a good place to put money that you may need within a relatively short time horizon. You can purchase Treasury bonds in terms as short as 1 month and as long as 30 years.

Other Bonds – If you are skittish about investing in stocks but want some more income, there are plenty of other bonds that pay higher interest rates. Bonds from overseas governments may pay more, and corporate bonds may offer higher returns, depending on their creditworthiness. Keep in mind that bonds with higher interest rates are more like to default, so you will need to have a good grasp of your own risk tolerance. Consider building a portfolio of bonds with varying interest rates and risk levels, or even take a look at some bond mutual funds.

Broad Index Funds– Conventional wisdom suggests that you should avoid investing in stocks if you think you’ll need the money within five years. That’s because any five-year period could include a sizable stock market dip, and you may not have time to recover your losses. That said, if you were to select any five-year period of stock market performance, you’d find that most investors will have made money by investing broadly in the S&P 500. If you decide to go this route, consider investing in low-cost mutual funds that track the stock market broadly and aren’t too heavily weighted with volatile stocks.

With mutual funds, your money is invested with others in a pool of investments designed to mirror or beat the overall stock market or a specific index. There are many options out there from companies such as Vanguard, Fidelity, T. Rowe Price, Franklin Templeton Investment, and others.

Many of these funds are passively managed and have ultra-low fees. Even funds that have managers who seek to “beat the market” have relatively low expense ratios in many cases. If your investing time horizon is short, you’ll want to avoid putting all of your money in index funds. In fact, even half of your total may be too much. But investing in the stock market this way will usually be a boost to your savings.

Peer-to-Peer Lending – An increasing number of investors have been finding success through platforms such as Lending Club and Prosper, which allow individuals to lend money to others who are seeking loans to pay off debt without the use of a bank. Peer-to-peer (P2P) lending is generally less risky than stocks, but it’s possible to get returns that are higher than bank savings or even bonds. This can be a great source of passive income.

Long Term (Beyond 10 Years)

Individual Stocks – If you have a long investing time horizon, you can take on some additional risk and purchase shares of specific companies. Seek to find companies with good valuations and good cash flow that have the potential for solid, steady growth. Shares of larger, diversified companies, can make great investments. Purchasing shares of smaller, more volatile companies can be quite profitable but can come with additional risk.

Growth Mutual Funds – Save yourself the trouble of selecting stocks and instead look for a mutual fund designed to match your investment goals. Millennials should consider mutual funds consisting of growth companies, including large blue-chip stocks that offer exposure to a wide range of sectors and industries. It may even make sense to invest in some international stocks through mutual funds. A well-managed growth mutual fund can average returns of more than 10 percent over time and can be a tremendous pathway to wealth.

Be sure to keep an eye on fees; generally, stay away from any fund with an expense ratio above 1 percent.

Exchange-Trade Funds – ETFs, as they are called, are much like mutual funds, but they trade more like stocks. They also generally have lower expense ratios than mutual funds. Millennial investors have been driving the popularity of ETFs in recent years.

Target Date Funds – As you get older and approach retirement age, it is sensible to shift some investments from riskier stocks to more stable investments such as bonds and cash. A target date fund will do the work for you. Target date funds operate with a specific year in mind based on your respected retirement date. A 2045 Fund, for example, will be designed to grow and protect the nest egg of someone retiring in the year 2045. These funds can be a great way to invest in a hands-off way. Critics of target date funds, however, say they are often too conservative in their investing approach and their expense ratios may be higher than other funds.